Selling rental, what taxes to expect

[pb4uski]

Was state wide rent control in place when you bought the property?

[ivinsfan]

You make some good points JoyLush, but you're not in a unique situation.

I have things I can vent about too.

Farmland owned over 30 years....try selling and seeing what the tax bill is...yes you could do installment sales but some people have a bad habit of defaulting on land contracts for deeds.

Now back in 2001 after my Mom died I put my share of money from selling her house into IBonds, that will mature in 2031 and 2032, the tax due on those will make the top of your head blow off.

So at some point if you have money, assets you'll pay the taxes and no one is happy about it but we don't have much control over it either. Best not to get too worked about it. No doubt 99% of people would consider me a whiner about the two examples listed above .

[Joylush]

Quote:

Originally Posted by pb4uski I dunno, I don't see taxes as being very unfair at all. Do we really expect a married couple that earns less an $25,100 to pay income taxes? (They already pay SS taxes). Below is a table of federal income taxes in 2021 for a MFJ couple compared to a 19% flat tax that would raise the same amount of tax. Lower income would pay a lot more while upper income would get a minor break. Income Tax After-tax Income Tax Burden Marginal Tax Rate   Flat Tax After-tax Income Change in tax Additional Tax Burden 40,000 1,490 38,510 3.7%     7,633 32,367 6,143 15.4% 80,000 6,190 73,810 7.7% 11.8%   15,265 64,735 9,075 11.3% 120,000 12,375 107,625 10.3% 15.5%   22,898 97,102 10,523 8.8% 160,000 21,175 138,825 13.2% 22.0%   30,531 129,469 9,356 5.8% 200,000 30,018 169,982 15.0% 22.1%   38,163 161,837 8,145 4.1% 240,000 39,618 200,382 16.5% 24.0%   45,796 194,204 6,178 2.6% 280,000 49,418 230,582 17.6% 24.5%   53,429 226,571 4,011 1.4% 320,000 58,818 261,182 18.4% 23.5%   61,062 258,938 2,244 0.7% 360,000 68,822 291,178 19.1% 25.0%   68,694 291,306 -128 0.0% 400,000 81,622 318,378 20.4% 32.0%   76,327 323,673 -5,295 -1.3% 440,000 94,422 345,578 21.5% 32.0%   83,960 356,040 -10,462 -2.4% 480,000 108,304 371,697 22.6% 34.7%   91,592 388,408 -16,711 -3.5% 520,000 122,304 397,697 23.5% 35.0%   99,225 420,775 -23,079 -4.4%

Yes, we disagree. Everyone should be required to pay something. And you’re leaving off the additional 3.8% Obamacare tax required on incomes over 200k as well as state taxes when it applies (and does in most states).

[Sunset]

Quote:

Originally Posted by ivinsfan ..... Now back in 2001 after my Mom died I put my share of money from selling her house into IBonds, that will mature in 2031 and 2032, the tax due on those will make the top of your head blow off. ... .

Not suggesting you want to do this, but I wonder if it's possible:

Are you able to start declaring the I bond interest each year ?

I know at the beginning one can declare it each year, or at the end, but is there a mechanism for starting to declare it each year when some years have gone by:
Perhaps one could claim (all previous years interest) then continue with yearly interest claims until the end ?

[Joylush]

Quote:

Originally Posted by ivinsfan You make some good points JoyLush, but you're not in a unique situation. I have things I can vent about too. Farmland owned over 30 years....try selling and seeing what the tax bill is...yes you could do installment sales but some people have a bad habit of defaulting on land contracts for deeds. Now back in 2001 after my Mom died I put my share of money from selling her house into IBonds, that will mature in 2031 and 2032, the tax due on those will make the top of your head blow off. So at some point if you have money, assets you'll pay the taxes and no one is happy about it but we don't have much control over it either. Best not to get too worked about it. No doubt 99% of people would consider me a whiner about the two examples listed above .

I don’t consider you a whiner. Then again I’m not sitting around bashing those who make more than I do and claiming they don’t pay their fair share. They pay more than their fair share. They pay their fair share as well as paying the fair shares of so many who pay little to nothing.

[ivinsfan]

Quote:

Originally Posted by Joylush I don’t consider you a whiner. Then again I’m not sitting around bashing those who make more than I do and claiming they don’t pay their fair share. They pay more than their fair share. They pay their fair share as well as paying the fair shares of so many who pay little to nothing.

Well my point was there really is nothing we can about it so it's more calming mentally and stress wise to try not dwelling on it.

But with what you wrote about selling off your rentals in the last few years I can see why it's a very sensitive topic to you...I completely get that.

[ivinsfan]

Quote:

Originally Posted by Sunset Not suggesting you want to do this, but I wonder if it's possible: Are you able to start declaring the I bond interest each year ? I know at the beginning one can declare it each year, or at the end, but is there a mechanism for starting to declare it each year when some years have gone by: Perhaps one could claim (all previous years interest) then continue with yearly interest claims until the end ?

I don't know and I don't trust the IRS to keep things straight. Looking back it would have been best to do that from the beginning.

Who would have thought that interest rates would go low and stay low for decades? Who would have thought that the inflation adjustment would turn into such a big bonus. I always thought I would sell off a few at a time and had no idea I would want to keep them all for 30 years..I'll just have to start looking at our tax situation starting in the late 20's and figure the best way to go taxwise.

[Joylush]

Quote:

Originally Posted by ivinsfan Well my point was there really is nothing we can about it so it's more calming mentally and stress wise to try not dwelling on it. But with what you wrote about selling off your rentals in the last few years I can see why it's a very sensitive topic to you...I completely get that.

I’m sorry if I came off as over stressing about it. It is what it is and based on what I know from being a landlord for 35 years it’s not something I would encourage my kids to get in to.

In my case I’ve found that I need to sell three houses per year and the profit on the third house covers the taxes due on the three of them. I make myself feel better by remembering the $6000 new AC (one example) is only really costing me around $4000.

And my goal now is to be sure to spend as much as possible to avoid estate taxes. I can look at that as whatever I want to buy I’m getting for 40% off. Can’t wait to get my Altoz tracked zero turn mower. It will compliment our new John Deere tractor well. Of course I’d rather leave the money to my family but that’s not possible without losing 40% to taxes.

Tax policy does drive behavior. I would be married but it would hit my other half too hard tax-wise being married to me. He’d like to sell his rental property but that would cost him over 10k in health insurance subsidies.

The idea of the government taking 40% of what you’ve worked your lifetime to earn is bothersome for sure. Especially the way they’ve devalued the dollar.

[pb4uski]

Quote:

Originally Posted by Joylush Yes, we disagree. Everyone should be required to pay something. And you’re leaving off the additional 3.8% Obamacare tax required on incomes over 200k as well as state taxes when it applies (and does in most states).

I'm not aware of any tax system where the first dollar of income is taxed, and you would have to do that if everyone paid something... so I don't see that happening and it has never existed in your lifetime so it isn't a realistic expectation.

Actually, the amounts in the table were arguably overstated because I ran the comparisons with all ordinary income and in reality, a large proportion of those with high incomes are taxed at more favorable preferential rates. If I go back and say that the $520k is all preferenced income then the tax, including NIIT is $72,375 or only 13.9%.

[RetiredAndLovingIt]

My son did a 1031 exchange when he sold his first rental last year in California and found out what his tax burden would be. He sold the house and bought a cabin in Big Bear for close to the same amount of money which he lists on Airbnb and made a lot of money last year far more than he expected, he only did it to give himself some breathing room to figure out the tax situation. After he has owned it for a year he can legally change his address to that location, drivers license etc and get a homeowners exemption on that property. The law allows for a husband and wife to own two properties. He has not done that yet and not sure he will. At some point he will have to pay the piper but maybe when his income is lower. In the winter he was getting $400 a night on holiday weekends for a tiny cabin and when it's not rented they can go there for vacations, it's less than an hour away. They control when and how much it lists for, the lowest being about $150 a night. There are a lot of expenses involved, it has to be professionally cleaned after every visitor, a local lady cleans it, washes the towels and linens and restocks for about $80 after every guest leaves. On Christmas Day he was called out because the guests could not figure out how to turn on the heating and that was a bit of a pain. There are some city taxes but overall he says far less hassle and work than with his renters and no government renter rules to worry about. I think he made about $15,000 in less than 6 months last year and that was when they had no clue what they were doing, they were just trying to clear enough to cover the small mortgage they took on it. Just something to consider but you only have 45 days to identify a new property for 1031 exchange AND Joe Biden wants to get rid of what he considers a tax dodge. Definitely talk to tax professional if it's a consideration. He's not making so much now because no snow in the summer but that's fine with him, and he can control his income by simply not renting it.
He sold his second rental this year but had lived in it for two of the last 5 years so they were able to avoid capital gains on a good portion of the sale. He now lives in a nice house on the lake that he bought last year that cost him less than what he sold these two rentals for due to the insane selling prices right now.

[pb4uski]

Quote:

Originally Posted by Joylush .... And my goal now is to be sure to spend as much as possible to avoid estate taxes. I can look at that as whatever I want to buy I’m getting for 40% off. Can’t wait to get my Altoz tracked zero turn mower. It will compliment our new John Deere tractor well. Of course I’d rather leave the money to my family but that’s not possible without losing 40% to taxes. Tax policy does drive behavior. I would be married but it would hit my other half too hard tax-wise being married to me. He’d like to sell his rental property but that would cost him over 10k in health insurance subsidies. The idea of the government taking 40% of what you’ve worked your lifetime to earn is bothersome for sure. Especially the way they’ve devalued the dollar.

So the 40% is after the $11.7 million exemption amount and the first $1 million that is taxed at various rates lower than 40%... so the first $11.7 million is 0% estate tax, then next $1 million is 34.58% and anything above $12.7 million is at 40%... so first, consider yourself very lucky and second, get going on estate tax planning.

So they don't really take 40% as you said because the first $11.7 million is 0%... even for a $20 million estate it would net out to 16.33%.

[ivinsfan]

Quote:

Originally Posted by pb4uski So the 40% is after the $11.7 million exemption amount and the first $1 million that is taxed at various rates lower than 40%... so the first $11.7 million is 0% estate tax, then next $1 million is 34.58% and anything above $12.7 million is at 40%... so first, consider yourself very lucky and second, get going on estate tax planning. So they don't really take 40% as you said because the first $11.7 million is 0%... even for a $20 million estate it would net out to 16.33%.

This is Fed I take it, don't forget the state needs their share of the bounty too.


I had a rude awakening when my cousin in PA died with a smallish think 700K estate and the PA taxes were not minor. In fact since the aunts and cousins aren't considered 1st degree relatives we paid extra!

[Joylush]

Quote:

Originally Posted by pb4uski So the 40% is after the $11.7 million exemption amount and the first $1 million that is taxed at various rates lower than 40%... so the first $11.7 million is 0% estate tax, then next $1 million is 34.58% and anything above $12.7 million is at 40%... so first, consider yourself very lucky and second, get going on estate tax planning. So they don't really take 40% as you said because the first $11.7 million is 0%... even for a $20 million estate it would net out to 16.33%.

And why should anything you’ve already paid taxes on be taxed all over again? It’s nothing more than a government money grab. Another penalty for not blowing everything you ever earned. Today’s savers are penalized by government policy keeping rates artificially low, and those who have managed to save or hold on to appreciated assets for awhile are penalized for saving too much.

And they don’t think this influences behavior? It does. Guess I need to look into marrying a younger person before I die to take advantage of the unlimited spousal exemption. I will give away whatever will be subject to the 40% tax before I give it to the government. It will be my last act of control over my own assets. Just annoying there is so much planning involved. The more you have the harder you have to work to keep it and the more you have to pay to protect yourself from liability.

And frankly that whole “you’re so lucky” thought process is insulting. Just another way to justify why I don’t deserve to keep my own money.

[Koolau]

Haven't followed this thread closely. I don't know much about selling rental property except that depreciation recapture really hurts.

Mostly I picked up on the issues with paying lots of taxes. I'm hearing of late that we will be paying for our more recent extravagances (and proposed extravagances) by "asking" the "rich" to pay their "fair share." Guess what, boys and girls. We have met the rich and he is us. YMMV

[workmyfingerstothebone]

Thank you everyone for your input and comments.


I definitely learned some stuff that I will bring to the tax preparer.


For the one post asking why I didn't sell the property 11 years ago you may remember that was during the housing crash. We used that as an opportunity to move into a nicer home for 1/2 the cost. Selling the original home for "crashed" prices would be a terrible financial move therefore we became landlords.



We decided to wait till the markets recovered, and they have.


I believe this happened to a percentage of home buyers during the crash , that is, becoming a landlord by chance not choice.


Anyway, I am happy with my decision of being a landlord for those 11 years and it has paid off, luckily. I know now I should have done more investigation into taxes.



If I remember, next April, I'll post how the taxes worked out.

[Joylush]

Quote:

Originally Posted by workmyfingerstothebone Thank you everyone for your input and comments. I definitely learned some stuff that I will bring to the tax preparer. For the one post asking why I didn't sell the property 11 years ago you may remember that was during the housing crash. We used that as an opportunity to move into a nicer home for 1/2 the cost. Selling the original home for "crashed" prices would be a terrible financial move therefore we became landlords. We decided to wait till the markets recovered, and they have. I believe this happened to a percentage of home buyers during the crash , that is, becoming a landlord by chance not choice. Anyway, I am happy with my decision of being a landlord for those 11 years and it has paid off, luckily. I know now I should have done more investigation into taxes. If I remember, next April, I'll post how the taxes worked out.

You will be happy when you’re relieved of the worry and burden and it’s a great opportunity to sell. I was kinda sad when I sold my first one purchased in 1986 and kept for 32 years but I never looked back and feeling was fleeting. Yeah, being fully depreciated the taxes were a bear! Such is life. You never make as much on them as you think you would even when they double or triple in value. Not when the upkeep costs, taxes etc…keep going up so significantly as they always do.

[pb4uski]

Quote:

Originally Posted by Joylush And why should anything you’ve already paid taxes on be taxed all over again? It’s nothing more than a government money grab. Another penalty for not blowing everything you ever earned. Today’s savers are penalized by government policy keeping rates artificially low, and those who have managed to save or hold on to appreciated assets for awhile are penalized for saving too much. And they don’t think this influences behavior? It does. Guess I need to look into marrying a younger person before I die to take advantage of the unlimited spousal exemption. I will give away whatever will be subject to the 40% tax before I give it to the government. It will be my last act of control over my own assets. Just annoying there is so much planning involved. The more you have the harder you have to work to keep it and the more you have to pay to protect yourself from liability. And frankly that whole “you’re so lucky” thought process is insulting. Just another way to justify why I don’t deserve to keep my own money.

Most estates, I'm guessing yours included, have significant embedded unrealized appreciation that has never been taxed and will never be taxed because of stepped up basis... so you haven't already been taxed on all of it. The estate tax is the quid pro quo to get the benefit of stepped up basis and you and your heirs avoid paying tax on all that unrealized appreciation.

I guess that alternatively, we could include in the income of a decedent's last income tax return all unrealized appreciation as of the date of death as if the decedent's assets had be sold for fair value, forgo an estate tax and keep stepped up basis.

Another way to think about it is that if you have an asset that you paid $1m for and is now worth $3m that the $3m isn't really all your money... a portion of that $3m is the government's money... it's just that they haven't collected it yet but they will have an eventual claim on it... either when you sell it in the future

[Joylush]

Quote:

Originally Posted by pb4uski Most estates, I'm guessing yours included, have significant embedded unrealized appreciation that has never been taxed and will never be taxed because of stepped up basis... so you haven't already been taxed on all of it. The estate tax is the quid pro quo to get the benefit of stepped up basis and you and your heirs avoid paying tax on all that unrealized appreciation. I guess that alternatively, we could include in the income of a decedent's last income tax return all unrealized appreciation as of the date of death as if the decedent's assets had be sold for fair value, forgo an estate tax and keep stepped up basis. Another way to think about it is that if you have an asset that you paid $1m for and is now worth $3m that the $3m isn't really all your money... a portion of that $3m is the government's money... it's just that they haven't collected it yet but they will have an eventual claim on it... either when you sell it in the future

You have some good points. But you should never be taxed on your original investment/savings. Only on the appreciated unrealized taxable value.

But the way it works they tax all your original principal as well as the value of the gains.

Thus any amount over the exclusion is fully taxed at 40%. It could be a million dollars tucked under your bed that you saved and never earned a dime on, but somehow you owe the government $400,000 of it just because you choose to save it? What the heck is that other than theft?

[RobbieB]

I dunno. But the 11 million in the bank is tax free. So your estate owes 400 grand on an 11 million transfer?

Oh the pain.

[Joylush]

Quote:

Originally Posted by RobbieB I dunno. But the 11 million in the bank is tax free. So your estate owes 400 grand on an 11 million transfer? Oh the pain.

You shouldn’t owe any taxes on any money you have already paid taxes on. I don’t consider it some sort of gift for them not to tax some of it. Your estate should only ever owe any taxes on only un-previously taxed gains. Why is what’s yours treated any differently just because you’re dead? Don’t be envious because someone else choose to save more than you did. You made full use of your money by spending it. So they should be penalized because they chose not to? How is that remotely justifiable in your code of ethics?

We need savers and investors, not just a bunch of spenders. If nobody was encouraged to invest and save their capital what do you think would happen to the economy then? The government should encourage investment and savings but tends to do the opposite.
Research the relationship between savings and economic growth. Savers should be rewarded, not penalized.